Moving, sell or rent old house?

Question

Hi all,

I know this gets asked a lot. I think I know the answer, but I'd like to run it by you all. We don't necessarily need to cash flow, we're just looking to leverage the 2.5% rate and hopefully benefit from appreciation and having someone else finish off this mortgage. We also don't *need* the equity toward the new place, although of course it wouldn't hurt. We've never had a rental property before, but we are handy and I do have some time/energy to put into such a thing.

We have a house in the Boston metro area that's worth around $900k. We refinanced a few years ago and now have a 15yr 2.5% mortgage with 12 years and $320k left. The monthly mortgage is $2700.  Property taxes here around around $10k/yr so around $800/month. There aren't a ton of comps, but from finding what I can, I think rent would be around $4k/mo. maybe up to $5k.

The problems I see are:

Rent is a low percentage of the house value, so not optimal use of this equity/capital.

Property taxes are high due to the higher house value

My costs would be a baseline of $2700+800 = $3500 plus maintenance, unoccupancy, etc. so basically breaking even cash flow for 12 years

If/when we sell it, we'll owe capital gains tax since we wouldn't have a "new" house to 1031 into. Not sure if/when we'd want to sell it though

But good things are:

Low interest rate so relatively low mortgage payment

Mortgage is paid off in 12 years

Area is likely to appreciate

The house is old (1896 ha), but in solid shape with almost every major system being recently replaced/done over. Heating/AC, appliances, electrical, windows, paint, etc.

Tax benefits? I need to learn more about this but I think the depreciation would only offset rental income (passive income) right?

Thanks!

Dan Weber · Answer

Hey Dan,

You’re in a great situation with this house, it’s a high level problem to have. One metric I love to use in your situation is “return on equity”. If your costs are $3500/month and it rents for, a best case scenario, $5000/month, you are cash flowing $1500/month. That is $18,000/year. If you divide that by your equity of $580,000, your return on equity is around 3%/year, and that’s best case scenario. At $500/month, your ROE is a little over 1%. Regardless of the great financing terms, it would be pretty easy to sink that equity into another investment property that beats that 1%-3% annual cash flow return. Obviously there are some appreciation and tax benefits, but another investment property will also have those same benefits.

Oftentimes, the 1031 can definitely be a leap of faith when you don’t have another property lined up to purchase. But with those return metrics, you could park your money just about anywhere else and get a return of 6%-10% and be making more money with that equity. I would hook up with an investor focused agent, whether it be local or out of state, that will really be able to help you find something under the time crunch of the 1031 to avoid those capital gains.

The other thing to consider that is that if you lived in the home for the 2 of the last 5 years, and are married, then you won’t pay capital gains taxes on the first $500k of gains.

I hope this is helpful. Feel free to shoot me a dm if you want to discuss in more detail.

Kyle Spearin · Answer

@Dan Durusky lots of great advice already in this thread. If I were you, I'd play out a few different scenarios.

1. HELOC. If the house is a primary, consider keeping it and getting a HELOC before moving. That way you can tap into the equity in addition to some cash flow resulting from the low interest payment.

2. 1031 exchange: what would you buy as your next property? You'll want to have this planned out so that you can make the exchange occur on the correct timeline (if you go the 1031 route). 3. Selling outright: depending on how much profit you've made, this may also be an option (speak with an accountant). This could allow you to put your profit into a few different deals.

4. STR/MTR: Boston metro has tons of hospitals, could you rent to traveling nurses and get more cashflow while keeping the house for potential equity gains in the future?

I think it all comes down to personal preference on this one, but you're in a good situation!

David M. · Answer

@Dan Durusky

https://www.biggerpockets.com/forums/48/topics/1169308-equit... you might want to check out my post here, and feel free to read around...

You don't mention whether its been your primary, within the past 2 of 5 years.  The sec121 exclusion of $500k for married is very powerful tax benefit.  Not sure what you purchased it for, but I'm guessing it will cover it.

As you may be able to tell, I've not a fan of immediately 1031'ing.  If you sell, you need to consider the full situation.  That might require running your taxes.  If you have been renting it, you will be building up Passive Allowed Losses (PAL) that will help offset the tax gain.

But, sounds like you haven't been renting.  If WANT to get into trying to be a landlord, this MIGHT be an opportunity.  Breaking even when considering vacancy and capex isn't necessarily bad.  If none are realized, then you'll have some extra cash.  If not, you break even.  As you have indicated, at least you are in a good area likely to appreciate.  That is normally where you make your gains.

Just realize that sometimes you do lose money in real estate.

Hope this helps.  Happy to chat.  Good luck.

Eric Dumais · Answer

Hi Dan,

I'm a newbie myself, but I'm in a similar situation and this is what I'm doing...

My wife and I bought our first house in August of 2020 for 305k with a 2.875% rate. It's valued at roughly 470k now and we still owe ~265k. We're going to be moving into a unique house-hacking situation this summer and have decided rather than sell we're going to rent the property out. We should be cash flowing between $500-$700 monthly (maybe more) and the rents will be relatively cheap compared to the value of the home. But because we can cash flow we feel it makes more sense currently to keep the property and sell within the next three years should we choose to do that and we'll still be able to avoid the capital gains and maybe even see more appreciation.

We live in Portland, ME and we've been seeing steady growth in rental prices as well as continued appreciation for single family homes. They're likely leveling out, but time will tell.

But in your situation, since you won't be cash flowing I'm not sure I see the upside of holding onto the house. Putting all of your eggs in the appreciation basket seems risky.

Curious to hear the thoughts of other more experienced investors.

Moving, sell or rent old house?

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